Business Process Modelling Financial Markets Operations
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1 Business Process Modelling Financial Markets Operations 7th May 2015 Leiden University Leiden Institute of Advanced Computer Science
2 Content Petrinet model van Valutamarkten Lopend onderzoek
3 Process modelling concepts Example informal process model : - Client buying $$ at a Bank, for tourist trip to New York a Client Bank Make request $$ amount for Euros Pay Euro amount Request Exchange Offer Euros Dollars Calculate Euro amount Pay Dollar amount Count Dollar amount So: are there any problems in this process design?
4 Process modelling with Petri nets A toy example : Start 1 Start Make request $$ amount for Euros request Calculate Euro amount Make request $$ amount for Euros request 1 Calculate Euro amount Exchange offer process execution Exchange offer Pay Euro amount Euros Pay $$ amount Pay Euro amount Euros Pay $$ amount Dollars Dollars Count $$ amount Count $$ amount End Petri nets for : End - Process simulation - Automated verification (incl finding errors)
5 Process modelling with Petri nets request Client E Exchange offer E Bank Euro E Client Dollar E Bank If Petri nets get very big the hierarchy feature allows for grouping of actions to get a better overview of the process. Behaviour of Client and Bank is the same, but specified separately
6 Case study: the FX-market The Foreign Exchange (FX) Market : With us since the existence of international trade Purpose is to exchange one currency for another to enable trade Participants: E.g. Tourists, Corporations, Governments, Banks. Processes Trading Settlement
7 Case study: the FX-market The Foreign Exchange (FX) Market : Relatively small and stable market until the Breakup of the Bretton Woods system in 1973 Transactions in the FX Market increased from about $68 billion per day in the early 1980s, to over $3 trillion a day in (most of which is accounted for by large interbank transactions) The settlement process for buying $$ at your local bank for a trip to NY cannot be used to process these astronomic amounts! We want a process design that can do this safely and efficiently
8 Case study: the FX Market Trading Bank A (Germany) FX-deal : 10 $/10 Euro Bank B (New York) Settlement Pay 10 Euro to A Pay 10 $ to B Bundesbank E A 10 B 20 C 0 US Federal Reserve $ A 10 B 10 C 10
9 Case study: the FX Market Model 1, Simulation 1 : Bank A (Germany) Bank A A A FX Market FX Market B B Bank B (New York) Bank B C C Before simulation : Bank C (Switzerland) Bank C Payment Instructions 3 Euro accounts 1`(BankA,10)++ 1`(BankB,20)++ 1`(BankC,0) EAccount Bundesbank Bundesbank US Federal Reserve US Federal Reserve DAccount 3 Dollar accounts 1`(BankA,10)++ 1`(BankB,10)++ 1`(BankC,10)
10 Case study: the FX-Market Model 1, Simulation 1 : Bank A (Germany) Bank A A A FX Market FX Market B B Bank B (New York) Bank B C C After simulation : Bank C (Switzerland) Bank C Payment Instructions 3 Euro accounts 1`(BankA,20)++ 1`(BankB,10)++ 1`(BankC,0) EAccount Bundesbank Bundesbank US Federal Reserve US Federal Reserve DAccount 3 Dollar accounts 1`(BankA,0)++ 1`(BankB,20)++ 1`(BankC,10)
11 Case study: the FX Market Bank A (Germany) FX-deal : 20 $/20 Euro Bank B (New York) Pay 20 Euro to A Pay 20 $ to B Bundesbank E A 10 B 20 C 0 US Federal Reserve $ A 10 B 10 C 10
12 Case study: the FX-Market Model 1, Simulation 2 : Bank A (Germany) Bank A A A FX Market FX Market B B Bank B (New York) Bank B C C After simulation : Bank C (Switzerland) Bank C Payment Instructions 1 1`(BankA,(~20),Dollar,BankB) Euro accounts Bundesbank US Federal Reserve Dollar accounts 3 1`(BankA,30)++ 1`(BankB,0)++ 1`(BankC,0) Bundesbank US Federal Reserve 3 1`(BankA,10)++ 1`(BankB,10)++ 1`(BankC,10)
13 Case study: the FX-Market This illustrates a well known problem in financial markets called settlement risk as illustrated by a famous incident in Banking history : On June 26, 1974 the German Authorities closed down the Herstatt Bank after several US Banks already had paid large sums of DM to the Herstatt Bank (to settle their FX-deals) but before the corresponding Dollar payments were made by the Herstatt Bank. The USD/DM FX-Market was seriously disrupted for several days. The response on the International community was the establishment of the Basel committee consisting of the heads of the Central Banks of the G10. Their concern with Settlement risk or Herstatt risk led to the establishment of the CLS-Bank by the G10 in 1997 which started operations in The Settlement process of the CLS Bank is designed in accordance with the Payment versus Payment (PvP) principle :
14 Case study: the FX Market Bank A (Germany) FX-deal : 20 $/20 Euro Bank B (New York) Pay 20 E to A Bundesbank E A 10 B 20 C 20 Pay 20 $ to B US Federal Reserve $ A 10 B 10 C 10
15 Model 2, Simulation 1 : Case study: the FX Market Bank A (Germany) Bank A A A FX Market FX Market B B Bank B (New York) Bank B C C Before simulation : Bank C Bank C Payment Instructions Euro accounts CLS Bank Dollar accounts 3 1`(BankA,10)++ 1`(BankB,20)++ 1`(BankC,0) CLS Bank 3 1`(BankA,10)++ 1`(BankB,10)++ 1`(BankC,10)
16 Model 2, Simulation 1 : Case study: the FX Market Bank A (Germany) Bank A A A FX Market FX Market B B Bank B (New York) Bank B C C After simulation : Bank C Bank C Payment Instructions 2 1`(BankA,(~20),Dollar,BankB,1)++ 1`(BankB,(~20),Euro,BankA,1) Euro accounts CLS Bank Dollar accounts 3 1`(BankA,10)++ 1`(BankB,20)++ 1`(BankC,0) CLS Bank 3 1`(BankA,10)++ 1`(BankB,10)++ 1`(BankC,10)
17 Case study: the FX Market 20 $ Bank A (Germany) Bank B (New York) 30 $ 30 E 20 E Bank C (Switzerland) 25 E 25 $ Bundesbank E A 10 B 20 C 0 US Federal Reserve $ A 10 B 10 C 10
18 Model 2, Simulation 2 : Case study: the FX Market Bank A (Germany) Bank A A A FX Market FX Market B B Bank B (New York) Bank B C C After simulation : Bank C (Switzerland) Bank C Payment Instructions 6 1`(BankA,(~30),Euro,BankC,3)++ 1`(BankA,(~20),Dollar,BankB,1)++ 1`(BankB,(~25),Dollar,BankC,2)++ 1`(BankB,(~20),Euro,BankA,1)++ 1`(BankC,(~30),Dollar,BankA,3)++ 1`(BankC,(~25),Euro,BankB,2) Euro accounts CLS Bank Dollar accounts 3 1`(BankA,10)++ 1`(BankB,20)++ 1`(BankC,0) CLS Bank 3 1`(BankA,10)++ 1`(BankB,10)++ 1`(BankC,10)
19 Case study: the FX Market 20 $ Bank A (Germany) Bank B (New York) Efficiency gain : 98 % 30 $ 30 E 20 E Bank C (Switzerland) 25 E 25 $ PvP + Netting mechanism Bundesbank E A 10 B 20 C 0 CLS A: - 10 E + 10 $ B: + 5 E - 5 $ C: + 5 E - 5 E US Federal Reserve $ A 10 B 10 C 10
20 Model3, Simulation 1 : Case study: the FX Market Bank A (Germany) Bank A A A FX Market FX Market B B Bank B (New York) Bank B C C Before simulation : Bank C Bank C Payment Instructions Client Accounts CLS Bank CLS Account 6 1`(BankA,10,Euro)++ 1`(BankA,10,Dollar)++ 1`(BankB,10,Dollar)++ 1`(BankB,20,Euro)++ 1`(BankC,0,Euro)++ 1`(BankC,10,Dollar) CLS Bank 2 1`(CLS,0,Euro)++ 1`(CLS,0,Dollar)
21 Case study: the FX Market Model3, Simulation 1 : Bank A (Germany) Bank A A A FX Market FX Market B B Bank B (New York) Bank B C C Bank C After simulation : Bank C Payment Instructions Client Accounts CLS Bank CLS Account 6 1`(BankA,0,Euro)++ 1`(BankA,20,Dollar)++ 1`(BankB,5,Dollar)++ 1`(BankB,25,Euro)++ 1`(BankC,5,Euro)++ 1`(BankC,5,Dollar) CLS Bank 2 1`(CLS,0,Euro)++ 1`(CLS,0,Dollar)
22 Conclusions Our example FX settlement process should be safe and efficient We can use Petri nets to make a process model and run it Simulation of the CLS model showed both: Safeness : PvP Efficiency : Netting Then we can use the process model as a blueprint to implement the process
23 Ongoing Research Goal : applying formal methods to solve ops/it problems in financial markets operations Example: modelling and analyzing interorganizational workflows (using BPMN)
24 Interorganizational workflows (and BPMN) Development in distributed systems (eg. Corba, SOA/SOC) Last years increased attention for IOWFs Process modelling languages eg. : BPMN 2.0.: Process diagrams Collaboration diagrams Choreography diagrams Inter-Organizational Workflow Nets
25 Interorganizational workflows (and BPMN)
26 Interorganizational workflows (and BPMN)
27 Interorganizational workflows (and BPMN) Problem statement: how to establish that the local workflows of your company are compliant with a global collaborative workflow
28 Interorganizational workflows (and BPMN)
29 Interorganizational workflows (and BPMN)
30 Interorganizational workflows (and BPMN)
31 Interorganizational workflows (and BPMN) Problem 1: BPMN has no formal semantics Solutions: Translating BPMN to Petri Nets Graph transformations (GROOVE) We extended the latter to include BPMN Collaboration diagram
32 Interorganizational workflows (and BPMN)
33 Interorganizational workflows (and BPMN)
34 Interorganizational workflows (and BPMN)
35 Interorganizational workflows (and BPMN)
36 Interorganizational workflows (and BPMN) :Ghost :Field :Field :PacMan marbles=3 :Field :Field :Field :Marble :Field
37 Interorganizational workflows (and BPMN)
38 Interorganizational workflows (and BPMN)
39 Interorganizational workflows (and BPMN)
40 Interorganizational workflows (and BPMN)
41 Interorganizational workflows (and BPMN)
42 Interorganizational workflows (and BPMN) Example : Target2Securities Necessary infrastructure for a single integrated European Capital Migration of national Clearing and Settlement operations to one European process Initiated in 2006 by the ECB Implementation : Budget: about Mrd Euro
43 Interorganizational workflows (and BPMN) Silo model: T2S-model
44 Investment Firm Broker/ Dealer Trading Venue Clearing Member Central Counter Party Custodian Central Securities Depositary Target2 Target2 Securities Platform
45 (
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